The overall score of vdp Issuance Climate ,based on a survey of member institutions of the Association of German Pfandbrief Banks conducted in November, remains in slightly negative territory. Nonetheless the vdp sees a positive outlook for Pfandbrief sales in the next six months. In contrast, there is growing reticence over the issuance of unsecured bonds. The prior six month period had shown a positive score for demand (+27), which then improved to +42, but falls back to zero for the next six months. The sentiment indicator ranges from minus 100 points to plus 100 points.

Ralf Löwe, Treasurer at Aareal Bank in Wiesbaden, confirms the overall picture, commenting that "at the beginning of 2024, the commercial property market was still viewed very critically – our first Pfandbrief issue in January faced some headwinds.“ At that time, the new issue premium was around 17 basis points.

„Things were very different in June and September when our issues were oversubscribed several times, and the premium was already back to a normalised 3 to 5 basis points. This shows that the overall climate has improved. Aareal Bank was able to take advantage of the constructive environment to place a Pfandbrief in sterling again after a long absence.“

Löwe currently sees the covered bond market burdened by the strong convergence of Bund yields with swap yields, and the greater supply from public-sector issuers. „Given the slight upturn in new business in property financing, and the fact that we can expect to see more issuers back on the market that were not so active in 2024, the supply of Pfandbrief should increase again somewhat in the coming year 2025,“ he says.

Commenting on the outlook for unsecured bonds, Löwe says that "the fundamental credit environment on the market is positive and, leaving aside geopolitical influences, is likely to continue in 2025 due to the strong and sustained inflow of funds.“

Senior preferred bonds, which are currently trading at very tight spread levels, have performed so well that the Pfandbrief, in particular, has become more attractive as an asset class. „Some investors who generally tend to invest in unsecured bonds are likely to increasingly consider the Pfandbrief as an alternative from a relative value perspective, which should lead to an outperformance of covered bonds compared to unsecured bonds," says Löwe.

Sascha Kullig, a member of the vdp Executive Board, points to the strong demand for senior unsecured bonds in 2024, showing thew confidence of investors in the credit quality of issuing banks. Banks have also been able to issue senior preferred bonds, subordinated senior bonds and even capital instruments such as Tier 2 bonds. Nonetheless, given the tightening of spreads on senior unsecured bonds, expecttations are more sceptical about demand in the coming six months.

Aareal Bank itself issued a senior non-preferred bond in May 2024, when the property market was under even greater pressure. „We received a lot of encouragement for this short-term issue - two years,“ said Löwe. „This encouraged us to launch a Tier 2 bond for 400 million euros in September. This requires a great deal of trust in the issuing bank. This bond was also oversubscribed several times.“

The Treasurer of Aareal Bank expects interest rates to fall by 150 basis points in 2025. „Interest rate uncertainty has been with us throughout 2024. This will continue to be the case. The market is pricing in the expected interest rate movements. As long as there are no major surprises, the market can deal with it," he says. The outcome of the elections in Germany, but also the first economic policy decisions of the new US president, have the potential to change interest rate expectations again, impacting the market.

In the vdp survey on the Issuance Climate, respondents categorised the interest rate trend over the next six months as a burden for both Pfandbrief and unsecured bank bonds, as the score of -70 in each case shows. There was a wide range of expected interest rate cuts, from a maximum of 75 basis points over the year to more than 150 basis points.

In light of this market assessment, Aareal Bank's refinancing approach for 2025 is opportunistic. „We try to refinance when the opportunity arises on the market and not when the funding plan provides for it", Löwe emphasises. This approach was illustrated by the senior non-preferred bond placed in 2024. „This only expired in November. A new issue was therefore planned for the fourth quarter. However, because we already saw a good market environment in May, we brought this forward. The Tier 2 bond was not planned until spring 2025. We have also brought forward the foreign currency bond planned for 2025 as a sterling Pfandbrief.“

The vdp member institutions expect the Pfandbrief market to grow in 2025. The planned new issues of 49.4 billion euros will be offset by maturities of 45.8 billion euros. The expected volume of new mortgage Pfandbrief is expected to be 40.3 billion euros, and 8.6 billion euros for public sector Pfandbrief. This means that the volume of outstanding Pfandbrief will increase in 2025.